Stocks that can rise with rates

To know how to combat climbing interest rates, you must first understand why they're going up.

This article was published in the August issue of Money magazine.

Whenever interest rates jump as sharply as they have recently, investors get rattled. But rising rates don't have to upend stocks as long as you know why yields are surging and how to react.

Some investors fear a replay of 1994, when the Federal Reserve hiked short-term rates six times to combat inflation that was already nearing the key 3% level. That pushed up yields on 10-year Treasuries and sent many stocks tumbling.

Consumer prices today, though, are up only around 1%. Rates are rising instead on fears that the economy is finally strong enough that the Fed can start cutting back on its bond-buying program. Even if that's true, the central bank is a long way from actually lifting short rates. So longer-term bond yields may not soar as much as they did 20 years ago.

This means typical rising-rate plays such as energy stocks may not be the best bet. Think counter-intuitively and focus on growth.

Have faith in financials

While banks could get hit if bond yields climb further -- since demand for borrowing would slow -- other financial companies, such as Charles Schwab (SCHW) and American Express (AXP), stand to benefit.

Among the stocks Sansoterra owns are the homebuilder D.R. Horton (DHI) and Genworth Financial (GNW), which sells mortgage insurance and annuities. Despite posting big gains, both trade at reasonable valuations.

Don't forget dividends

As rates have risen, some income investments that are traditionally viewed as bond alternatives -- such as utility stocks -- have taken a hit.

But Jim Russell, senior equity strategist at U.S. Bank Wealth Management, says, "It would take a really persistent rise in rates before high-dividend-yield stocks lose their attractiveness over bonds." This is especially true of fiscally strong firms that can boost payouts.

A good place to look, he says, is in the consumer staples sector. Clorox (CLX) and Campbell Soup (CPB) both yield around 3% and have raised their dividends faster than average.

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.